Cost of Iranian conflict likely to extend beyond energy prices, says URI economy professor
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The attacks, which were celebrated by many Iranians around
the world in ending an oppressive regime, sparked significant conflict where
ongoing missile strikes are occurring in the Middle East. Economically, energy
costs—particularly oil and gas—have spiked in the U.S. and abroad. More
recently, vessels traveling the Strait of Hormuz—a critical global shipping
route—have struck mines reportedly planted by Iran, further affecting
commercial activity.
Nina
Eichacker, associate economics professor at the University of Rhode Island,
says everyone will feel the effects of the ongoing conflict in the Middle East
the longer it lasts. And, it’s not just at the pump where society will be hit
hard, she says. Instability and civil unrest in the region also has a cost.
What would you say is the greatest concern involving the conflict in Iran and rising energy costs associated with it?
Along with the risks that current conflict creates for
anyone in our community who lives or works (or who has family or friends living
or working) in the Middle East, I am thinking a lot about the effects of the
current crisis on energy prices. As we’ve seen, this conflict has been followed
by a dramatic increase in oil prices for a few reasons.
First, combatting nations are targeting oil producing
facilities, which both constrains supply and increases the time required for
eventually returning to producing the volume of oil necessary for what fossil
fuel users around the world expect to acquire. Second, Iran’s decision to close
the Strait of Hormuz—by attacking ships, and threatening to place mines in that
body of water—where one-fifth of the world’s oil and natural gas is shipped,
considerably restricts global supply of these widely used fuels.
Oil prices have risen from approximately $73 per barrel
before the Feb. 28 attacks to as high as $120 a barrel. Those prices remain
volatile, but some analysts predict that if the Strait of Hormuz remains
closed, oil prices could rise to $200 a barrel. Gas and jet fuel prices have
risen in short order, fertilizer prices are rising, and many other products
that require oil (plastics), as well as the cost of distributing goods, will go
up.
If refineries are closed, the cost of returning to activity is considerable.
Refining oil around the world will become more expensive the longer crude oil
access is limited, which will eventually affect prices of a wide range of goods
and services.
Who do you feel will be impacted the most with these
rising costs?
Anyone who pays to fill up their gas tank and who heats
their homes with oil will likewise be affected. These costs are going to affect
people across the entire income spectrum. However, the increases will be
particularly hard for low-income and fixed-income households, since these
households spend a larger share of their income on fuel.
Beyond just increased oil and gas prices, how else will
the Iranian conflict impact society?
Civil unrest is costly. Instability in the region hurts
Americans who live and work in the Middle East, and it hurts anyone in our
region with family or friends there. It also affects the productive potential
of affected countries. The destruction of infrastructure delays these countries
from rebounding and producing goods and services that trade partners rely
on.
It curtails production of other goods and services in the
region, including pharmaceuticals, iron ore, and agricultural products such as
nuts. While the United States has trade sanctions in place with Iran, Iran
trades a lot with countries such as China, Turkey, and India—all countries that
the U.S. does a considerable amount of trade with. All of these changes are
likely to lead to higher costs, output shortages, and more dire consequences as
the military conflict persists.
Do you feel these rising energy costs could extend into
the summer months? If so, how?
It all depends on how easily the combating nations come to
agreements after the fact. I think there’s a credible risk of this conflict
lasting. Even if the conflict is resolved, it will hamper existing refiners
returning to operation the longer the Strait of Hormuz is closed, extending the
lag for consumers around the world. I remember oil prices in 2007 and 2008 when
I was a new college graduate; I could certainly see prices lingering between $4
and $5 per gallon, or more, as demand peaks in the summertime.
Where do you see this conflict heading and how might that
impact the United States economically?
It will get worse for the average American if this conflict
continues. While the U.S. is the largest global exporter of oil and natural
gas, the time required to increase the scale of domestic production is
considerable, and there’s no guarantee that those stocks would be marketed to
U.S. residents.
Congress could authorize the release and sale of strategic
petroleum reserves—as the Biden administration did in 2022.
Are there any steps people can take to help mitigate the
impact of rising energy prices?
People should start saving more in an attempt to prioritize
budgets. In the medium term, thinking about reliance on smaller vehicles,
carpooling or electrifying more could all help. This is especially difficult
right now given the Trump administration’s measures that have added tariffs to
imports that could facilitate these changes.
